Profits from mining stocks were generally harder to come by in 2017, which makes following these 20 tips all the more important

We still believe most investors should consider investing in mining stocks as part of a diversified portfolio.

Mining stocks are investments in companies that produce or explore for minerals, such as uranium, coal, molybdenum (which is used in steelmaking), copper, silver and gold.

Mining stocks can generally be broken up into two categories, majors and juniors. Majors are typically mining companies that have been in the mining business for many years and more often than not they operate producing mines on a global scale. Majors have proven methods for exploration and mining, and have consistent output year over year.

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Mining stocks play a key role in your portfolio whether commodity prices are up or down. Pat McKeough tells you why in this special report—and gives you the outlook on gold, copper, uranium, and the remarkable story of Canadian diamonds.

Junior mining stocks are usually smaller companies and take on risky mining exploration. If a junior mining stock is successful at finding a mineable mineral deposit, it can mean huge returns for investors.

While junior mining stocks may offer some speculative appeal, we continue to recommend that you cut your risk in the volatile resource sector by investing in mining stocks of well-established mining companies with high-quality reserves. However, resource stocks (and this includes oil and gas, of course) should make up only a limited portion of your portfolio—say less than 20% for a conservative investor or as 30% for an aggressive investor.

20 tips for investing in mining stocks

Focus on stable political regions: We generally stay away from mining companies operating in insecure and politically unstable regions such as Venezuela, or in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they rely oon the foreign company’s capital and expertise to get any value out of the ground.

Invest in mining stocks as a hedge against inflation: Many investors buy mining stocks, including gold stocks, as a hedge against inflation, and some mining stocks pay dividends. But most mining stocks also offer an inflation hedge—they rise along with commodity prices and inflation.

Aim for a dividend yield: Copper stocks generally have higher dividend yields than gold stocks because they have steadier demand and more stable prices. As well, they’re usually much cheaper than gold stocks in relation to their earnings and cash flow. That means they potentially have less room to fall if markets in general fall. That’s also another way of saying that they can be less risky than gold.

Consider investing in mining ETFs—especially for gold and silver: The overall trend for gold and silver in 2017 has been to move higher. Although they will likely remain volatile, they may move up even further over the longer term if inflation or global political and economic instability hurt key currencies, such as the euro or the U.S. dollar. If you want to hold a number of gold or silver stocks, many exchange traded funds offer top-quality global miners and low fees.

Look for longevity in reserves: When you invest in any resource stock, gold included, you need to look at how long the company’s reserves are likely to last. Those with low reserves need to have consistent success in their exploration programs to maximize the production of the mine and the surrounding area. That success is far from guaranteed.

Invest in stocks with a broad base of operations: Even if the company has strong reserves, the best mining stocks with the least risk also have a diversified reserve base. That way they are not dependent on a single mine’s production or political stability in any one country. Mining companies can also increase their reserves by making acquisitions—with mineral prices down from their record highs, you may see an increase in mining company acquisitions at distressed prices.

Look into steady production: Some of the most highly promoted mining stocks, including gold mining stocks, are penny stocks which have yet to produce an ounce of gold or other minerals. Many must still add to their reserves, invest in mine-feasibility studies, and raise a lot of money before they go into production. The prospects for most of these penny-mine properties, even though they may be in areas with production from existing mines nearby, are far from certain.

Seek strong reserves, low production costs and mines that are already producing: Good mining stocks have a range of development projects, but their strong base of production cuts the risk of relying on new developments alone.

Focus on established areas: When we recommend mining stocks, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.

Think like an environmentalist: We look at environmental constraints where juniors are looking for minerals. In Europe and certain parts of the U.S, they need a particularly rich find to justify the costs of overcoming environmentalists’ objections.

Invest in well-financed mines: We look for well-financed mining stocks with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior miners have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.

Look for strong balance sheets: The best mining stocks all have strong balance sheets and low debt.

Pick the right location: We want to see favourable factors, like strong mineral showings from extensive drill programs, before we recommend investing in mining stocks that operate in hostile environments, like the high Arctic.

Avoid hype: We avoid investing in mining stocks that trade at unsustainably high prices due to broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.

Look at the market cap: We always look at the market cap of gold mining stocks versus the estimated value of the mineral resource they have in the ground. Sometimes, a company’s marketing efforts are so successful that they drive the stock up too high in relation to the size of its ore body. For example, we like a gold stock’s market cap to be no more than half the value of the gold. We assume that the company will be able to expand its ore reserves after the mine opens, but if the mineral reserves are double the gold mining stock’s market cap, it provides a margin of safety.

Seek high average daily trading volume: This is one positive factor to look for when picking junior mining stocks. The more actively traded junior mines are, the more liquid they are, which makes them easier to dispose of when it’s time to take profits.

Avoid mining stocks that trade at unsustainably high prices: This is usually due to broker hype or investor mania about the underlying commodity (such as gold). Instead, we focus on reasonably priced mining stocks with favourable geology.

Identify a partner: The best junior mines have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.

Think twice about gold bullion: Gold bullion investments have hidden costs that dramatically eat into your earnings potential over time. Gold bullion and gold coins require insurance and special storage plans which will incur costs for as long as you keep them.

Invest in gold stocks instead of bullion: Invest in gold through gold-mining stocks. Unlike bullion, these stocks at least have the potential to generate income. High-quality gold stocks can pay off nicely by establishing new mines and raising their production, even if gold goes sideways for a lengthy period. But keep in mind that no matter how appealing they look, you should limit gold stocks to a modest part of your portfolio.

Although investing in mining stocks can be highly volatile, they often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they have grown at higher-than-average rates within the mining industry, or within the market as a whole, for years or decades.

Mining stocks have suffered over the couple year, but many have moved up in 2017. Do you continue to hold your mining stocks? What else would you add to this list?

Note: This article was originally published in 2014 and is regularly updated.

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Mining stocks play a key role in your portfolio whether commodity prices are up or down. Pat McKeough tells you why in this special report—and gives you the outlook on gold, copper, uranium, and the remarkable story of Canadian diamonds.

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Opinions and information herein is for general purposes only and not intended as personal investing advice. Some recommendations are bound to prove disappointing—know that over time investments can go up and down. Past performance is no guarantee of future returns.